We cannot return to the innocent Citroën 2CV world of lateComparing notes on Keynes austerity and the EURO currency union with Paul Krugman, and Václav Klaus, first drafted on March 12, published on March 13, 2013--------------------------------------------------------------------------------------------------------------------------------

If anything, the outcome of the Italian parliamentary election has made it necessary to engage, yet again, in a serious soul searching about the best possible interpretation of the economic reality we live in. To help you pick your side we would like to offer you a head to head with two of the most relevant economic thinkers of our times, Nobel laureate Paul Krugman, and former Czech President Václav Klaus. Here we go.

Paul Krugman’s Position

Noah denkt™’s Position

Mr. Krugman says that governments are overly obsessed currently with reducing the deficit since austerity measures in times of a deeply depressed economy will only worsen that depression and lead to an even more devastating unemployment rate than we actually have at this point. .

Historically, he would argue, it is no problem to run a deficit that it is higher than 100% of GDP. Britain has done it for a long time, and it wasn’t a problem. Japan even reaches 200% of GDP and it isn’t a problem. So there is no reason to fuss over an 80% debt rate at a time when the economy badly needs counter-cyclical investment from public budgets.

Mr. Krugman agrees though that fiscal deficits eventually need to be reduced. He would submit though we still have quite some time left (perhaps until 2025) until such cutting measures need to be introduced on a substantial scale.

Continuing with the current austerity measures will however lead to an entire generation being lost in the doldrums of a badly performing economy. This will not only entail a substantial loss of skills on the part of those who suffer from long-term unemployment. No, it may also have dramatic consequences for the coherence and viability of a democratic system as such.

Noah denkt™ believes that it isn’t just governments that worry about the current debt levels, - it is the markets that do so as well. (Witness among others the downgrading of countries like France, Britain and the US; witness Rick Santelli’s ranting against the US debt and witness the huge spreads between German and Spanish bond yields.) And the fact that markets do worry about the current debt levels may have something to do with the unwillingness of earlier governments to reduce the deficit when they had an opportunity to do so. But this may not be the only reason why markets fuss about state deficits.

Much rather does it appear as if it is time now to give people the opportunity to understand that it isn’t up to others but to ourselves only to find the hope, the confidence and the staying power which will allow us to manage our future adequately.

The former Czech President Václav Klaus arguesthat local currencies are necessary adjustment mechanisms that allow countries to recalibrate their economic strength according to the realities that they find on the ground. Hence, any attempt to establish a fixed exchange rate system between countries sooner or later has to fail, since the fluctuating pressures of disparaging economic realities in those different countries eventually become so huge that they are impossible to withstand. (Witness the inevitable end of the Bretton Woods-system, witness the disaster of Argentina’s currency board system against the US dollar, witness the disintegration of the former Czechoslovakian currency union).

In view of this, it is, according to Mr. Klaus, quite irrational to believe that such widely different countries as Greece and Finland, to name just a few examples, could continue to prosper while sharing the same currency. Unfortunately, the opposite is true. And as long as the authorities in the EURO-zone do not recognize that they are fighting the laws of nature by insisting on a currency union for 17 member states, the EURO zone countries will not have a chance to leave the recessionary environment that they are currently in.

But, it isn’t the unreasonably large currency union alone that, in Mr. Klaus’s view is hampering the European growth perspective. It is also the interfering, decree-wielding power of an overly bureaucratic regime in Brussels that does so. And last but not least, it is the patronizing and dependency generating character of the European welfare state that does so. Unless, there is substantial change in these three areas (i.e. the European notion of welfare state, the market debilitating power of bureaucracy and the overly ambitious reality of a currency union) Europe cannot hope to prosper.

We are not as sure though as Mr. Klaus is, that the EURO currency union will only be viable if the number of member states is reduced to six or seven relatively homogeneous countries in Northern Europe. After all, it has to be recognized that economic reality is quite different even inside individual member states. (Just witness the difference between Germany’s prosperous South and its impoverished North East). And still no one seriously believes that the currency union between say Bavaria and Mecklenburg-Vorpommern should be dissolved.

No, what ultimately decides if poor and rich countries can prosper inside the same currency union is the political determination in subject countries to do so. And here we need to ask our devaluation-prone brothers in the South whether they truly believe that our societies continue to afford a return to the old Citroën 2CV days of late? We doubt that. Instead, we believe that the world of Gento, Pirri or Butragueño has just as much disapperared as that of Francoise Sagan, Claude Chabrol or Louis Malle. After all, it can’t be denied that we do want to enjoy the spoils of a CR7-Champions-League environment. And so we should embrace our forward-looking aspirations and stop romanticizing about the good old local days gone by.

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Update posted on March 15: Finally, for all of those of you, who do not trust Noah denkt™'s economic analysis, you may want to listen to Latvia's Prime Minister Valdis Dombrovskis instead. He appeared on March 15 on CNBC to highlight his country's success with EURO-style austerity. To see the interview, please click here.